Nostalgia is Bittersweet - Kraft Work |
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Published on Tuesday, the 26th of January 2010 |
The recommendation by the Cadbury board last week that shareholders should accept a £11.5 billion ($19.5billionn) bid from the US food giant Kraft has caused a wave of patriotic nostalgia as well as political soul searching to sweep the nation. Though in many ways just another international business deal the sale of this historic and much loved British institution to the Americans has again raised the question of business patriotism, national interest and reminded everybody that we are very much part of a global economic ecosystem.
Growing concerns over foreign ownershipRobert Peston the BBC Economics correspondent puts forward a view that whereas once the British Government took great pride in the fact that many of our most successful industries were considered attractive enough to be cherry picked by rich international competition and that this attracted the cream of world management to our shores – now it might not be quite as sure. More and more question marks are starting to appear against the wisdom of the policy. 'There was a conviction,' Peston says, 'which may have been wrong, that those who sold their stakes in British business would re-invest the proceeds here.' He continues, 'Today however there are growing fears that there will be a price for Britain from what some see as the surrender of control over our economic destiny
He's not the only one with concerns. Peter Mandelson has already publicly warned Kraft against trying to 'make a fast buck' from the Cadbury deal and quickly received communication from Kraft's chairman and chief executive Irene Rosenfeld writing to assure him of Kraft's 'respect for Cadbury's heritage and employees.'
Despite Prime Minister Gordon Brown saying the government was 'determined' to ensure that Cadbury jobs were secure, Cadbury Chairman Roger Carr conceded that job losses are inevitable. According to Peston's analysis, 'when Kraft is choosing to create jobs or make important investments, its instinct is likely to be to favour its home territory of the US rather than Britain.' If Kraft was looking to save some serious cash even the US might be considered an expensive option when compared to other lower wage economies.
Other politicians take a more militant view than Mandelson and there have been requests for the Government to block the deal on the grounds that job losses will impact on the economy.
The free market
Here are some of the famous brand names now in foreign hands; Corus (British Steel) Jaguar, the Body Shop, O2, Midland Bank, P&O, Bass and Rowntree. Even ownership of a number of utility companies as well as the UK's nuclear power industry (which is owned by the French) has left the country. The Kraft/Cadbury deal puts the whole issue firmly back in the public arena.
Of course, the Government doesn't want to be seen to be interfering in the free market and they realise all too clearly that investment and tax revenues are important to the economy in many ways.
The UK is rightly proud of its reputation as one of the most business friendly, red tape free, transparent and accessible market places for international commerce. 'Sage of Omaha,' billionaire investor Warren Buffett tells the BBC that though he actually has doubts about the Kraft/Cadbury deal he's bullish about the UK’s prospects and is prepared to invest in the UK.
Britain's non-interventionist, pro-business attitude has played a decisive role in the success of the UK economy over the last 15 years. The last thing the UK Government needs are nervous businesses threatening to quit the country if they don't get what they want.
What needs to be asked and perhaps the Kraft/Cadbury takeover has put this under the spot light, is – 'is the balance right? Is Britain getting its money's worth?'
Give and Take
Alistair Darling faced down the threats of the banking industry and introduced the tax on bonuses. It remains to be seen whether predictions of mass exodus come true or not. Other industries such as the gaming industry decamping to Gibraltar and I.T, making their bases in Luxembourg and Ireland, for example, show that it can be done.
As Richard Northedge at BNET points out: 'whole companies from Shire to UBM have changed their corporate domicile from Britain to reduce their corporation tax.' Truly multi-national companies have the ability to do this – to do what they need to do to minimize their tax obligations, their wage and manufacture costs at the same time operating in the most profitable markets.
Northedge adds: 'while governments spend and the private sector provides the funding, the state must always give in to companies that threaten to take their taxes elsewhere.'
Well there's a deal – the Government facilitates and the companies generate tax. It’s a form of harmony, give and take. If the Government doesn't deliver business goes elsewhere. What happens though if businesses don't step up?
To allow for this the EU is attempting to standardise tax rates to complement a single market. Luxembourg’s Finance Minister Luc Frieden has expressed enthusiasm to extend minimum – and even maximum – rates of taxation within EU member states to corporate taxation, and certain types of income such as dividends, royalties and exceptional pay. A more harmonized international taxation may lead to less controversy than the recent brouhaha over the amount of tax revenue that Google has been obliged to pay HMRC.
Despite the Internet search engine operating as Google UK Ltd in London, any UK firms that advertise with it end up making payments to a subsidiary based in Ireland, where corporation tax is far lower than in the UK. It is estimated that Google legally avoid paying £110m of UK tax in 2007. Vince Cable, the deputy leader of the Liberal Democrats, told the Times: 'Google is another in a long line of companies who seems to think that paying British taxes should be optional.'
The French have decided that instead of simply complaining about the situation they are going to take action and have proposed a 1% to 2% Google advertising tax on the largest and most successful Internet companies such as AOL, Microsoft and Google. 'For the time being, these companies are taxed in the country in which they are headquartered even though they make up a big part of our advertising market,' said French President Nicolas Sarkozy.
Achieving an agreeable, sustainable equilibrium seems to be the key to success - too much intervention is counterproductive, scaring business away and ruining tax returns. Too little and those returns fail to exist in the first place. It's a fine commercial and political balance for government and commerce alike.
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